Market Nervosa

January 6th, 2019 
Keith Schneider         

Happy New Year and welcome back to Mr. Market who was recently diagnosed with

a resurgence of Market Nervosa, a mental condition resulting in wide market swings.

This was not unexpected, as he often suffers from episodes of anxiety especially after a very difficult year and a horrible December.

On Friday, Mr. Market’s new meds finally kicked in.  He responded well on Friday with an added boost from a very robust employment report.

He shook off bad tidings such as the government shutdown, a newly divided capitol hill, the Apple revenue bombshell, worsening of the yield curve inversion, and continued trade wars.

Fridays bounce put the equities market on positive footing short-term as the Russell 2000 (IWM) regained its 200-week moving average. The badly beat up NASDQ100 (QQQ) put in the best performance (up +4.3%) of the major indexes. This erased Thursday’s loss, and ended the week up on a positive note.

This week’s takeaways are:

  • The yield curve inversion increased which is the best lead indicator of recessions (up to 2-year lead-time)
  • IWM which led on the downside, recovered and closed above its 200-week moving average (WMA)
  • The S&P 500 held its 200 WMA and bounced while the NASDAQ 100 put in a very strong weekly performance
  • Biotech (IBB), a speculative sector, is showing good relative strength
  • Market Internals have improved and are now on a positive footing
  • Volume patterns are showing major improvement

Other noteworthy themes are that Emerging Markets and Latin America (ILF) have been showing excellent outperformance versus the S&P 500, although it needs to confirm in price. Good relative performance does not necessarily equate to positive returns unless confirmed price.

However, Emerging Markets is one of the places to look for the next mega-trend as it is poised to make up for lost time.

Stepping back and looking at the bigger picture, equities have regained their footing short term. Longer term there is still major overhead resistance.

Any rally is suspect in the context of…

  • Gold’s strength,
  • An inverted yield curve with the Fed’s back against the wall to raise rates considering the robust job report.
  • An economic slowdown in China

All of which will add fuel to lower lows down the road after this rally runs out of gas.

On the other hand, we must stay flexible as the recent strength in both Emerging Markets and growth stocks could mean that we have really bottomed, and that equity markets just reset to bullish mode.

A settlement with China and a re-opening of the government could be the catalyst

Regardless, growth stocks which got pummeled since October offer a great opportunity after the correction and should continue to respond nicely to current conditions in which case you should look at our fully automated trading model called the NASDAQ 100 All Stars.